From the chamber of secrets

Spearhead Analysis – 12.05.2015

By Enum Naseer
Senior Research Analyst,
Spearhead Research

Pakistan National AssemblyRumor mills are abuzz with reports that Pakistan’s economy is already in the shackles of deflation. Eventually it all boils down to the prevalence of a faulty monetary and fiscal policy. Once an economy falls into deflation, it becomes very difficult for policymakers to figure a way out.  Pakistan’s case is even more complex: the inflation statistic cannot be trusted to depict the true picture of the country’s economy. There has been a lot of debate around the composition of the index. Experts have argued that the inflation data is inaccurate: in estimating the magnitude of inflationary pressure, an undue amount of importance has been attached to the increase/ decrease in the base price of electricity. On the other hand, fuel adjustment charges have not been included in the calculation. To arrive at the desired numbers, a lot of thought has been put into selecting components and then assigning them weights.

What is more unfortunate is the fact that the monetary policy stance bases itself on these figures. If the accuracy of these figures is compromised, even the best of policymakers will be unable to come up with a solution to the problem. Undoubtedly, any decision taken based on these statistics will only lead to disaster. While the government, public institutions and lending agencies continue to indulge each other in delusions of success and competence, it is the economy that continues to rot away and the people who must pay the price, sooner or later.

Fear mongering isn’t entirely unwarranted as deflation is not a phenomenon that occurs naturally within an economic cycle. Deflation occurs when the inflation rate falls below zero. To stimulate the economy, what other option is left for the central bank other but to take the policy rate to a figure below the inflation rate even if lies within the negative territory? What would previously have struck economists as an outlandish idea has actually been put into action in European countries (Sweden being an example). Desperate times, desperate measures!

It is interesting how this debate seems entirely premature for now. The government and the financial institutions need to come clean first. If for nothing else then simply with the intention to put these rumors to rest: educate the people that this is disinflation and not deflation; that policy-making is not being held hostage to the reckless frenzy to engineer desired, superficial progress. If the country is to venture into the future with its eyes blindfolded then it should fully understand the risks associated with not recognizing that inaction will only deepen crises and make it more difficult to maneuver.

Rising unemployment, poverty and population growth rates are stirring a dangerous brew for the national leadership. There is little to look forward to in wake of persistent denial by individuals who have the power to turn things around. It is not hard to imagine what the future will be like in a country that is already marked by great social unrest.

Tailpiece: PILDAT has recently released a report titled ‘Score Card in Federal Government Quality Governance’. The report states that the federal government has been unsuccessful in controlling poverty, inflation and unemployment. It has been highlighted therein that the government achieved merely 22% of targets in its efforts to decrease poverty. In other news, Pakistan is all set to receive the 7th tranche of the IMF bailout package by June after successful conclusion of talks with the lending institution.